Keyed-Up Bond Market Takes a Bit of Comfort from Nasdaq Decline

Treasuries made small gains on light volume and little news, as the nation awaited the U.S. Supreme Court's ruling on the presidential election in Florida.

The afternoon erosion of the Nasdaq Composite Index was the only discernible reason for the gains, market watchers said. Declines in the Nasdaq have been associated with rising Treasury prices for most of the last six months, as bond investors interpret them as an indication that economic growth will slow.

"The only thing that moved us into positive territory was the declines in the Nasdaq," said Maryann Hurley, a bond trader at D.A. Davidson in Seattle.

But there was little focus on anything but the Supreme Court, Hurley said. "It is really, really quiet," she said. "Everybody is waiting for the Supreme Court ruling."

At the Chicago Board of Trade, the March Treasury futures contract rose 4/32 to 103 14/32.

Volume was light. According to GovPX , $18.1 billion changed hands through 3 p.m. EST, 36.8% less than average for a Tuesday over the past month.

The court's ruling has the potential either to seal Republican candidate George W. Bush's victory (in the event Florida's recounts are permanently stayed) or to keep alive the possibility that Democratic candidate Al Gore will eventually prevail (in the event the recounts are allowed to go forward).

A finding for Bush will hurt the Treasury market, while a finding for Gore will help it, many analysts and investors believe. A Bush administration will run smaller federal budget surpluses than a Gore administration, allowing less debt reduction, they reason. By using federal budget surplus funds to pay down the national debt by retiring Treasury securities, the Clinton administration has helped increase their market value.

At the same time, to the extent that stock investors prefer Bush to Gore, a finding for Bush could hurt Treasuries by touching off a rally in the stock market.

"People are afraid to take a position one way or the other in the Treasury market because the market could go one way or the other depending on how the court rules," Hurley said. "I think we're going to have a knee-jerk reaction one way or the other. If they rule for Bush the stock market is going to surge and bonds will go down. If they rule for Gore, stocks get crunched and we go up."

It's also possible that the Treasury market won't react as sharply to a Bush victory as to a Gore victory, said David Ging, Treasury market strategist at Credit Suisse First Boston. Because of the court's conservative bent, a Bush victory is seen as the likelier outcome. To the extent that the markets expect a finding for Bush, they won't react much to it. "It's largely priced in," he said. A finding for Gore, on the other hand, could cause Treasuries to rally as stocks fall, as they did when the Florida Supreme Court ruled for Gore on Friday.

Once the election has been decided, the Treasury market may be ripe for a selloff, Hurley said. In her view, the low level of Treasury yields suggests that people believe that the economy is headed for a recession. If major economic data -- including tomorrow's retail sales ( definition | chart | source ) report for November -- don't show extreme weakness, investors may respond by selling Treasuries. "The bond market has a tremendous amount of bad economic news priced into it," she said.

Economic Indicators

In economic news, the weekly retail sales reports were surprisingly weak, news that the bond market welcomes because it indicates that economic growth is slowing. The BTM Weekly U.S. Retail Chain Store Sales Index ( definition | chart ) fell 0.3% in the latest week. The Redbook Retail Average ( definition | chart ) found December sales running even with November after two weeks, compared to a target of 1.0% ahead.

Currency and Commodities

The dollar rose against the yen and fell against the euro. It lately was worth 111.44 yen, up from 110.84. The euro was worth $0.8788, up from $0.8758. For more on currencies, see TSC's Currencies column.

Crude oil for January delivery at the New York Mercantile Exchange rose to $29.68 a barrel from $29.50.

The Bridge Commodity Research Bureau Index fell to 229.91 from 232.36.

Gold for February delivery at the Comex rose to $273.20 an ounce from $273.10.